The stigma of subsidies

Does the financial support given to hospitalists spell trouble for the specialty, or is it a sign of growing pains?by Bonnie Darves

Published in the November 2003 issue of Today's Hospitalist

To some in the hospitalist field, it’s a dirty word—precisely the thing that could keep hospital medicine from becoming a full-fledged, standalone specialty. To others, it’s a fact of life, a necessary foundation for the way hospital medicine functions and delivers its now widely recognized care-improvement benefits.

Regardless of which camp you side with, one thing is certain: Hospitalization program subsidization is a hot topic.

Firmly established in the subsidy-as-detrimental camp is Adam Singer, MD, CEO of IPC-The Hospitalist Company. Dr. Singer may quibble with using the term “subsidy” to refer to the financial

"We spend more than we are reimbursed, and hospitalists allow us to get closer to a break-even basis.”

—Richard Afable, MD Catholic Healthcare East

support that hospital medicine programs receive from sponsoring institutions, but he firmly believes that anything that smacks of financial support and prevents hospitalist programs from flying solo financially is a bad thing.

“We in the industry—and there are a lot of us in this debate—are trying to build a new specialty. And it’s hard to build a new specialty when the underlying assumption is that it’s not financially viable—that hospital medicine requires a subsidy to exist,” says Dr. Singer, a pulmonologist who launched the North Hollywood, Calif., company in 1995.

Dr. Singer is so certain that hospitalist programs don’t need a subsidy to survive that he’s built an entire business model on his premise. IPC, which has 300 employed physicians whose practices it purchased and now operates, produced $54 million in revenues in 2002, has a presence in nearly a dozen markets, and netted a $15 million round of venture capital in October 2002.

At the other end of the spectrum—almost—is Winthrop Whitcomb, MD, co-founder of the National Association of Inpatient Physicians (now the Society of Hospital Medicine) and head of the 12-physician hospitalist group at Mercy Hospital in Springfield, Mass. Regardless of where the money comes from, Dr. Whitcomb says, hospital medicine is here to stay. In a sense, he argues, that makes the argument about subsidies academic.

“Sometimes I think it’s a question of semantics,” he says. “Maybe we shouldn’t use the word ‘subsidy’ because it has the connotation of a handout or that ‘you couldn’t cut it on your own.

“The way I see it, I’m spending three of my 10 hours a day in quality improvement activities that make the hospital a better place, and I’m getting fair market value for my services,” he continues. “After all, no one calls the $5,000 [monthly pay] a nursing home medical director receives a subsidy.”

Systemic issues

In Dr. Whitcomb’s view, the history of hospital medicine speaks for itself, and the ever-growing demand for the services hospitalists provide assures the profession’s future. In the last decade, hospitals have incurred a slew of new reporting and program requirements from accrediting agencies and regulatory bodies, ranging from quality-improvement and patient-safety initiatives to pain-management and disease-management programs.

At the same time, medical staffs are eschewing the uncompensated patients who show up in the emergency room and on hospital nursing units, and subspecialists in growing numbers are refusing to take ER call. The convergence of these trends is leaving hospital administrators in a coverage bind.

“Basically, you have hospital administrators realizing that besides uncompensated patients, they have a plethora of systemic issues—Joint Commission gymnastics, the incredible regulatory burden—that are beyond inpatient care and that require someone to handle them,” Whitcomb says. “And part of the reason hospital administrators are willing to pay [hospitalists] to do these things is because they understand that the payment system is broken. They also understand that hospitalists, by nature, are interested in making systems of care as efficient as possible.”

Early data on those efficiency gains—as measured by more streamlined care and reduced length of stay for conditions such as congestive heart failure and post-MI care and stroke care—may be fueling the spike in demand for hospitalists. It also likely figures in hospitals’ willingness to pay the tab for hospitalist services. A recent survey from the Society of Hospital Medicine found that on average, hospitals contribute $300,000 a year to support hospitalist programs.

Steve Nahm, a California health care consultant who has helped develop hospitalist programs, notes that the $300,000-average figure is just a starting point. An estimated 75% of hospitals provide financial backing or subsidies for their hospitalist programs, and in some cases that support exceeds $700,000.

“Good data [on financial support] are hard to come by, and the amount hospitals pay really depends on payer mix and patient volume,” Mr. Nahm says. He adds that some general acute-care hospitals pay as much as $700,000 annually to support or subsidize their programs, often looking at the outlay on a per-case rather than per-program basis.

Increased scrutiny

For hospital administrators, the subsidy debate may have more to do with how the money is paid out than with the amount itself, Nahm suggests. For many years, for example, hospitals have paid physicians for ER call panel coverage. More recently, hospitals have also paid for coverage in obstetrics, neurosurgery and other services in which specialists may be in short supply.

The big difference, Mr. Nahm says, is that hospitals typically pay those sums in individual checks. Because hospitalist programs are paid in larger lump sums, hospital CFOs may be more closely scrutinizing the bill for inpatient physicians than the tab for other services.

“Administrators are asking whether they’re getting value for their money and whether the service could be provided with fewer physicians,” he says. “They should ask those questions, but the point is that they pay more attention to it because it’s one big check to a group rather than a series of checks being paid to individual physicians. If they looked at it differently—in the larger context of support for ER call, which is the No. 1 reason hospitals establish a program—they probably wouldn’t be as concerned.”

Pat Cawley, MD, who directs hospitalist services at Medical University of South Carolina in Charleston and formerly headed an independent group and consulted to organizations setting up programs, views the subsidy debate from a practical perspective. The divisiveness has emerged, he says, “only because certain people are proponents of the for-profit model—and they think you can set up a program without a subsidy.”

Dr. Cawley admits that model can work, but only, he maintains, if the program is limited in scope and is restricted only to patient care. And such programs are the exception rather than the norm, he thinks.

He identifies three areas in which hospitalist programs need a subsidy of some sort: situations when there is a poor payer mix, for any reason; when the hospitalists are involved in education of medical students or residents; or when there is an administrative need.

In the latter case, he explains, that need might be clinical, such as when a hospital needs in-house night coverage or code coverage. The need could also be nonclinical, in the case of quality improvement or patient-safety initiative management.

“If you don’t do any of these things, you don’t need a subsidy,” Dr. Cawley says. “But hospitals are recognizing that they need to pay for those things,” and that hospitalists are ideally suited to the task.

A business case

Many institutions are, in fact, looking beyond the big check to the even bigger benefits that are accruing from their hospitalist programs. For the institution that can reduce LOS by a day or more for DRGs that are reimbursed on a case-rate basis, that sum may ultimately be more than offset by care-quality gains and even bottom-line financial improvement. An emerging body of literature—two articles in the January 2003 issue of Annals of Internal Medicine cited care and cost improvements delivered by hospitalist programs, for example--is providing supporting data on value.

But some hospitals are so satisfied with their own results that they aren’t too concerned about what the literature says. Baptist Hospital in Pensacola, Fla., has saved nearly $1.7 million since it implemented a full-scale hospitalist program in 2001, in partnership with Cogent Healthcare, according to Ron Greeno, MD, the company’s chief medical officer. “The forward-thinking hospitals understand that a hospitalist program can help them as an institution—that there’s a significant benefit in return in investment, if it’s done right,” Dr. Greeno says.

He adds that Baptist is now saving $800 to $1,000 per case on its top 15 DRGs and has seen a 50% reduction in readmission rates among patients managed by their hospitalists compared with patients managed by other medical staff. The first-year support for the program was $400,000, and Baptist is considering expanding both the program and its financial outlay for hospitalist services, based on its results.

In the model used by Cogent, which now operates in 13 markets and employs 70 physicians, fees are based on the total costs of running a program—including salaries, call center staffing, operations, and information systems, among others.
At what Dr. Greeno calls “early volumes,” roughly three to four physicians managing 225 to 250 patients a month, a typical Cogent program might run $700,000 annually.

While that figure definitely qualifies as “big bucks,” Dr. Greeno says, hospitals don’t quibble when they begin reaping the savings. His company’s typical program saves between $400 and $1,000 per case for complex diagnoses, he claims. Over the course of a year, that could equal savings of up to $920,000.

The big picture

Such dramatic cost and care improvement scenarios also figure in Catholic Healthcare East’s long-range goal to implement hospitalist programs at all of its 32 hospitals. The Newton Square, Pa.-based system’s flagship program, run by Dr. Whitcomb at Mercy Hospital in Springfield for a decade, has become a model not only for CHE, but also for programs throughout the country, according to Richard Afable, MD, CHE’s executive VP and chief medical officer.

“It’s been a major success as measured by clinical outcomes, coordination of care, patient satisfaction and financial performance,” Dr. Afable says. Not only have quality indicators for diagnoses like CHE improved significantly; costs have declined in tandem.

In 2002, for example, charges per case for community-acquired pneumonia came to an average of $10,670 for patients managed by hospitalists. By comparison, charges for patients managed by nonhospitalists came to $12,823.

Dr. Afable uses those figures to explain why he—and CHE—don’t focus unduly on program costs and so-called subsidization. Budgeting for the hospitalist programs differs among the eight institutions that now have them in place, but the philosophy is the same: Administrators view the services that hospitalists provide in the larger context of how all care is delivered.

“If we were looking at hospitalists as an independent service line or product, generally speaking the revenue created by hospitalists directly doesn’t cover the expenses,” Dr. Afable explains. “However, because the benefits are so broad-based, they more than make up for the expenses if you consider them in the larger package of coordinated hospital services care. The simple reality is that for most medical diagnoses, we spend more than we are reimbursed, and hospitalists allow us to get closer to a break even basis.”

Peter Plantes, MD, vice president of patient care for the Irving, Texas, hospital cooperative VHA, concurs that the “simple reality” Dr. Afable cites is a key factor driving development of hospitalist programs in VHA’s 2,200 member organizations. The increasing demand for help with program implementation prompted VHA’s recent decision to strike an alliance with IPC, Dr. Plantes notes. And at this point, most VHA hospitals are looking at hospitalist programs not as a cost center to be subsidized, but rather as one way to improve finances over the long run.

When it comes to starting hospitalist programs, he says, most organizations view the idea as a business model and use a two- to three-year business plan. “They recognize that the program will need front-end support,” Dr. Plantes explains, “but that when they roll it out as a business it will start returning on that investment.”

Dr. Whitcomb agrees with that assessment and says that based on his own experience, he expects that the subsidy issue will someday soon become moot. Right now, Dr. Whitcomb suggests, hospital medicine physicians would be better off focusing less on the controversy surrounding who pays the bill and more on how to meet the growing demand for services while ensuring that appropriate payment mechanisms are developed by government and private payers.

“There is no single force in health care that will make this [hospitalist] movement go away,” Dr. Whitcomb says. “Everything is driving it in the direction of growth and sustainability. My concern is that I don’t want people to burn out.”

“The major problem is hospitalists not getting paid fairly for what they do, by billable services,” he explains. “It seems clear that payment mechanisms will follow in time,” and that’s the debate hospitalists ought to engage in.

Growing pains

For his part, Dr. Cawley urges his colleagues and new physicians entering the field to take the long view—and to recognize that any profession in its infancy will have growing pains.

“I often make the comparison to emergency medicine,” he explains. “Emergency physicians are 20 to 30 years beyond where they started, and they’ve proven their value to themselves and the larger medical community. No one questions their role anymore.”

“As hospital finances mature, they’re trying to create incentives to improve quality,” he adds. He is sure that hospitalists will fit nicely into that changing paradigm.

“The people who are going into this field now don’t worry about the subsidy issue,” Dr. Cawley adds. “The people who moan about it are those who are already in it and just don’t like the stigma of subsidy.”

Bonnie Darves is a freelance writer specializing in health care. She is based in Lake Oswego, Ore.